Answer to Question #193029 in Macroeconomics for Dinithi Dasanayake

Question

What is product differentiation? What role does it play in the determination of price under monopolistic competition? Discuss.

“There is no unique solution to the problem of determination of price and output under Oligopoly”. Discuss

Answer 1

The monopolistic firms are price makers in the market and so they produce a good which is same to all other goods in the market but yet differentiated compared to its rivals such and they are not perfect substitutes. Examples of the product differentiation is motor cycles. All the companies in the market make motor cycles but they are different models.

There are many firms in the market and differentiation becomes important to convey the features such as type, quality and the appearance of the product.

The firm needs to connect to the buyer and develop its niche in order to sell the unique characteristics of the product

Given that There is no unique solution to the problem of determination of price and output under Oligopoly”.

The main reason for this problem is:

• Mutual interdependence of firms:.        Because there are two to three major companies in the market competing for, so actions of one firm can influence others and this resulting in overall losses, so companies under this structure go for mutual interdependence and there is no unique solution to the problem of determination of price and output under Oligopoly.